Playing the Palladium

Poor palladium is finally starting to get the spotlight. As the ugly little sister to platinum, it was long regarded as one of the byproducts of platinum production. I mean, don't get me wrong, it's always helped the bottom line, but it's never been the metal a company's looking for. Well, it seems those times are changing.

You see, for several decades North America's Platinum Group Metals (PGM for short) have always been palladium-heavy, as opposed to say South Africa's platinum-heavy PGMs. But with the recent power problems in South Africa, platinum's meteoric rise is taking palladium along for the ride. And like an understudy's big shot on Broadway, palladium is making a break for the Big Time.

Over the past five weeks or so, the price of palladium has sky-rocketed due to not only South Africa's woes, but the #2 producer right now is Russia. And a lot of investors don't want to deal with the whole fear-of-nationalization thing. Just these two things alone would make palladium spike in these speculative times. But even when the price isn't moving much intraday, the number of orders put through each day for the metal are on the rise, too. So higher volume and more trades in a day, in my mind, means higher interest in the future of palladium. While I'm just too damn lazy right now to go look at statistics about the trading volume, I can offer that as a person who reads the 'All Metal Table' at kitco.com several times each day, I can say that the time of last trade has been changing almost in pace with silver each time I check.Palladium used to trade like Rhodium: maybe once in the morning and once at night. Just take a look at the Kitco tables during the day to see what I mean.

At first all of this interest was merely a reaction to short-term supply fears, but now speculation is setting in and people (meaning, the big companies that control the market) want to make a buck or two off the white metal. And why do they think they'll make a bundle? Because with the skyrocketing platinum price, the two metals have never been further apart in value.

Personally, I think this means that platinum will come down a little, and palladium over the next six months will play catch up. And I really don't know what the experts are saying on the issue, because after reading a dozen totally contradictory accounts, it seems like nobody really knows anyway.

But all of this chaos and the run up in palladium prices turns out to be awesome news for Canada and the United States. Because 1) we've got decent power supplies, 2) we've got palladium-heavy PGM reserves, and 3) we aren't likely going to nationalize whatever company we want in the name of our country.

So in the short-term, the North American companies, (preferably producers), with palladium resources may be a good trading option. That doesn't mean jump in right now though. Palladium has risen very quickly and needs some consolidation. So when we do get that cool-off, I'll be looking at adding some palladium companies.

I've already done a little trading in a palladium stock. And I say trading because I was only in the stock for about five or six weeks, and I bought it totally speculatively, not based on its business fundamentals. I purchased North American Palladium (TSX: PDL; AMEX: PAL) on January 4, 2008, and sold my last remaining shares yesterday. I bought in @ $4.02, sold half at $8.15 thinking it would correct, and then sold the other half yesterday @ $9.17. Don't get me wrong, this company may be totally solid and worth the investment, but I haven't done enough due diligence on the management or the company's fundamentals to really tie up cash for the long-term. Plus, after more than doubling in the past six weeks, I think it's time to let this stock have a breather. I will very likely look into the company more in the next few weeks, especially since it is producing in Ontario, a historically mining-friendly province.

The other company I'll look into for investing is Stillwater Mining. It's the only platinum and palladium producer in the States. It reported a modest profit for the past quarter, but a deficit for the year due to labour relation issues (including the double whammy of attrition and strikes). They are also still under hedge contracts for the first part of 2008, which may allow for some weakness in the stock price during a possible palladium consolidation. So that may allow a good entry point for a long-term investment. Now if you are Canadian and hit the trifecta, CAD above par, then Stillwater may become a screaming buy as it's only listed in the States. And then you can think, "who's got the Monopoly money now, suckers?", as you snap up shares.

The other reason that I like the producers for investment is that the palladium story is also starting to hit the mass media. All of a sudden there are articles showing up about how palladium will save us all (especially automobile and aerospace manufacturers ), since it can be used to replace the much-more-expensive platinum. So now the race is on to expand palladium use in PGM-heavy applications. The added bonus is that China has pledged that in the next 15 or so years it will bring its country up to the U.S. 1960s standard of living. So that will further drive PGM demand as automobiles become more prevalent in the world's fastest growing economy.

And for the super-speculative plays, there are also large PGM deposits owned by tiny companies: Noront Resources (NOT.v) with a $597M market cap; Golden Chalice Resources (GCR.v) with a $62M market cap; Pacific North West Capital (PFN.to) with a mere $30M market cap; or, maybe even add more Kodiak Exploration (KXL.v) for its Caribou Lake property. Oh yeah, market cap of $237M.

But the best part of palladium's story is that it's still unfolding. And for some of us, maybe that'll include a happy ending.